Carrying a considerable amount of debt can be extremely daunting. Often you may not feel like you see any light at the end of the tunnel. But that doesn’t mean hope is lost.
With the right repayment strategy, you may be able to make more progress than you think. Two common debt repayment strategies are the “snowball” method and the “avalanche” method. Let’s take a look at each of these—and help you decide which best serves your needs and financial goals.
What is the debt snowball method?
The aptly named snowball method is a strategy that focuses on eliminating the number of outstanding loans as quickly as possible, thereby freeing up more of your income to put toward your remaining debt. You’ll pay off the smallest balance first, eliminating a monthly minimum payment. That will give you extra funds each month to channel toward your next smallest balance.
As a hypothetical example, let’s say you’ve got four credit cards with the following balances and minimum payments:
- $1,000 ($40 minimum payment)
- $2,000 ($90 minimum payment)
- $3,000 ($120 minimum payment)
- $4,000 ($150 minimum payment)
By paying off the $1,000 balance as quickly as possible, you’d have an extra $40 per month to put toward your $2,000 balance. Once that’s paid off, you’d have an extra $130 to put toward your $3,000 balance. The amount you can afford to repay effectively “snowballs” as you eliminate monthly payments.
Pros and cons
Pros
- Snowballing can have positive psychological effects as you see your outstanding accounts dwindle.
- Each eliminated balance gives you more money to throw at your remaining debt.
- Simple process to implement (sort your debts by balance and start at the bottom).
Cons
- You may pay more interest in the long run if larger balances have higher APR than lower balances.
- If all balances are comparable, you’re better paying down the highest APR.
- If you have a larger loan that is secured, it could make sense to pay it off first—since the consequences of defaulting are more severe than an unsecured debt (losing your car, jewelry, etc.).
What is the debt avalanche method?
The avalanche method prioritizes eliminating debts with the highest APR (annual percentage rate) instead of knocking out outstanding loans quicker. You’ll put your funds toward whichever balances have the most offensive interest rates. This can potentially save you the most money in the long run.
That’s because prioritizing debts with higher APRs can mean paying less in interest over the life of your loans. This may result in trimming your overall repayment timeline significantly. Let’s assume interest rates on the previous example of card balances to show how it works with the following hypothetical:
- $1,000 (18% APR)
- $2,000 (28% APR)
- $3,000 (20% APR)
- $4,000 (25% APR)
Each month, after you’ve made the minimum payment on each loan to remain in good standing with your lender, you’ll allocate any extra funds to your $2,000 balance. Once that’s paid off, you would do the same for your $4,000 balance.
This method involves a lot of discipline, and it may take some time before you begin to see those higher balances get smaller. But again, it’s also likely to best help you avoid flushing money down the commode in the form of interest charges.
Pros and cons
Pros
- Knocking out your highest APR first can minimize the total interest you pay.
- More money may go to principal each month as your most egregious interest rate is neutralized.
- Keeps you more focused on the order of account payoff than a snowball (which may have balances that increase according to your needs).
Cons
- Focusing on the highest interest instead of the lowest balance means it could take longer to pay off your first account.
- The avalanche method may deprioritize balances on a credit card offering 0% intro APR—even if the interest-free window is soon closing.
- It lacks the quick-win psychological effect of the snowball method.
Which strategy will save you money and keep you motivated?
Both debt repayment strategies are effective, but one is likely better for you than the other. Here are a few questions to ask yourself to help you decide which is a fit for your unique situation.
How big is the spread between interest rates?
You may have multiple balances but similar interest rates on all. If that’s the case, the avalanche method won’t make a tremendous amount of difference—but the snowball method can. Quickly paying off one debt can make it easier to pay off the next.
Will quick wins boost my morale?
Carrying around an armful of outstanding balances can be draining, both emotionally (staring at a laundry list of debts) and mentally (juggling multiple monthly payments). Eliminating those account balances can be good for the mind. If you value quick wins like that, the snowball method is the way to go.
Is one debt significantly higher-interest than all the others?
If the gamut of interest rates across your accounts is vast, you may prefer the avalanche method to the snowball. As an example, if one of your credit cards charges a10% APR and another charges a 30% APR, it’s urgent that you focus on the higher-rate account so that you’re not hemorrhaging money to interest charges. A 10% APR is a great deal when it comes to credit card rates.
How to start your debt payoff plan
1. List out your debts (and monthly minimum payments)
You need to know exactly what you’re dealing with when it comes to your debt. You may even be a bit nervous to formally add it all up, but it’s a critical step. You need a picture of your payoff goal, as well as the amount of money you’re spending on minimum payments.
2. List all other monthly expenses
The next step is to examine your other monthly costs to see how much of your income can be spared to repay your debts. Add your debt payments with your monthly necessities (rent, utilities, car payment, gas, food, etc.) and work to ax as many discretionary items as possible.
3. Select your payoff method
Now that you know how much money you can dedicate to your debt each month, choose the debt repayment method that best fits your situation; snowball if you’d prefer to lower your number of outstanding balances as quickly as possible, or avalanche if you’d rather get rid of the highest APR as quickly as possible.
4. Set up autopay
Of paramount importance is that you don’t neglect a single account in the name of “optimizing” either of these repayment methods. Always pay the minimum monthly amount for each account, or your credit score will crater. Payment history is the most important factor of your credit score, accounting for a whopping 35% of your score.
The takeaway
The best debt repayment strategy for you will ultimately depend on the one you think you can stick to. Debt repayment often takes a lot of time and commitment. While analyzing which option will save you the most money in the long run, don’t underestimate the importance of morale.
Frequently asked questions
Which method helps me save more on interest over time: snowball or avalanche?
While you may think the avalanche method is the no-brainer way to save the most money (and it often is), this isn’t a hard rule. Zeroing out smaller debts can free up extra monthly income to put toward those higher interest rates to get them repaid faster. You’ll have to do the math to see which is a better fit for your particular situation.
Which debt payoff strategy works best if I need quick wins to stay motivated?
If you need quick wins to stay motivated, the snowball method is the way to go. You’ll watch the number of outstanding balances disappear and manage fewer loans each month.
Can I switch from the snowball method to the avalanche method later on?
You can switch between the snowball method and avalanche method whenever you want. You may begin with the snowball method just to rid yourself of more minor debts before then focusing on the avalanche method to eliminate the highest interest for the remainder of your debt repayment plan.
Which debt repayment method is better if my main goal is reducing financial stress, not just saving money?
The answer to this varies by individual. You may find it less stressful to see a slowly dwindling high-APR account, or you may prefer to watch the total number of outstanding balances decrease. There’s no one right answer—but the snowball method typically is better known for reducing stress.
How do minimum payments factor into a snowball or avalanche debt payoff plan?
Minimum payments are extremely important with both snowball and avalanche debt payoff plans. They assume you’re making minimum payments on all your loans each month; they then help you to wisely use the remaining money you can afford to put toward debt.
